This post is adapted from the recently-released publication “Inclusive Insurance: Closing the Protection Gap for Emerging Customers,” a joint-report from the Center for Financial Inclusion at Accion and the Institute of International Finance, in partnership with MetLife Foundation.
As many know too painfully well, catastrophic events like climate change-related disasters can cause financial stress long after they have occurred. In fact, less than 30 percent of losses from catastrophic events are covered by insurance, which means the remaining 70 percent of the burden is carried by individuals, firms, and the “insurer of last resort,” governments. According to the Insurance Development Forum, a 1 percent increase in insurance penetration could reduce the disaster-recovery burden on taxpayers by 22 percent.
The United Nations member states, in the Sendai Framework for Disaster Risk Reduction, declared that governments have the primary role in reducing disaster risk. Governments can be well-positioned to support the introduction of insurance products to those in rural areas who are particularly vulnerable to the effects of climate change. Additionally, many observers believe that agricultural insurance requires government subsidies. Governments have a key role to play here, but they shouldn’t have to go it alone. The responsibility of buffering against the effects of disasters should be shared with other stakeholders, including local government and the private sector.
New forms of public-private partnerships can help countries absorb the financial consequences of catastrophic events. Swiss Re partners with governments and multilateral institutions through public-private partnerships that mitigate the effects of natural catastrophes. Paula Pagniez of Swiss Re points out that the key is long-term investment. A number of innovative projects have folded—not because they are unsuccessful, but because donors are not thinking long-term.
In China, the government persuaded hundreds of millions of farmers to use insurance to hedge against the risks of climate change. The government subsidizes the insurance, but at least 20 percent of the premiums come from farmers.
The government of India, after mounting losses due to extreme weather—80 percent of which were uninsured—is mandating insurance to address its highly vulnerable agriculture sector. Its recent scheme, Pradhan Mantri Fasal Bima Yojana, launched in 2016, sets premiums for farmers growing specific crops. The government has also required private insurers to set aside 20 percent of policies to cover people in rural areas.
Insurance companies manage their own risk in part by protecting farmers from adverse changes in the climate through activities such as training on how to cope with erratic weather patterns and paying for artificial hail-suppression services.
It is also worth mentioning multi-country risk-pooling initiatives such as the African Risk Capacity partnership, which works with member states of the African Union while drawing on expertise, underwriting, and reinsurance from private companies such as AXA and Willis to help governments respond to extreme weather events and natural disasters.
Often, these complex partnerships benefit from external brokering. Cenfri, as an independent policy think tank, has the patience for brokering longer-term relationships and models. The MicroInsurance Centre likewise has deep experience working with commercial insurers, foundations, bi- and multilateral development agencies, regulators, NGOs, and others. The International Finance Corporation has promoted insurance as an element of public-private partnerships to address climate risk and other challenges.
We cannot insure our way out of all the risks of climate change and natural disasters, yet governments and insurers are recognizing the risks and working creatively with a range of partners to mitigate them.
For more on inclusive insurance, read “Inclusive Insurance: Closing the Protection Gap for Emerging Customers.”
Image credit: International Maize and Wheat Improvement Center
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